On the board’s agenda
| February 2016
In this issue...
Private company governance
Independent board members can be a
valuable resource for private companies
Entrepreneurs are typically strong willed people, and for
many the thought of having to answer to similarly strong
willed independent board members about the decisions
they make for their businesses is not particularly appealing.
They may also believe the cost, time, and effort required
for a board with independent members could be put to
better use elsewhere in their businesses.
Despite that, a growing number of privately-owned
companies have opted to have boards with independent
board members, believing that the perspectives and
insights that they can bring to the company far outweigh
any constraints. While some companies choose to include
independent board members on their board of directors,
most appoint them to a board of advisors.
Benefits of a board
Being the CEO of a private company or family-owned
business can be a lonely position, and they can benefit
from having a group of people with whom they can share
ideas and perspectives. Independent board members
may also bring a different and wider range of perspectives
to the CEO than are typically found in a privately-held and
family-owned business.
However, independent board members should be much
more than just a sounding board for the CEO.
A key benefit of having
independent board members
is their different and diverse
perspectives, as well as their
ability to augment the business
owner’s own knowledge
and expertise with their
own different backgrounds
and experience.
Independent board members could bring knowledge
and expertise in areas where the CEO’s and management
team’s knowledge may be lacking, such as internal
controls, finance, human resources, marketing, tax,
and other areas. Independent board members may
also have important industry expertise and first-hand
experience gained from working with other organizations
facing difficult challenges, such as a cyber attack or
managing a crisis.
Private company governance
A board also helps private companies build trust with other
organizations, since a board extends the accountability
for the company beyond just the CEO. For this reason,
some lenders require private companies to have boards
as a condition for extending financing; many lenders are
likely to look more favorably on private companies with
a more robust governance structure. Similarly, a board
may be a signal to customers and suppliers that they are
doing business with a reputable organization that will be
sustainable over the longer-term.
As a private company grows, the owner’s role will change,
as will its management processes. In smaller start-up
companies, owners usually take a hands-on role. Processes
throughout the organization are informal; since the owner
is involved in most activities, he or she has a first-hand
knowledge of almost every aspect of the business. As the
company grows, new people are added to the team and
the owner’s role becomes more of a manager, and the
need for more formal processes, knowledge sharing and
delegation increases. Experienced board members can
guide CEOs as their role changes and new processes are
implemented, and can also offer assistance in developing
a shorter- and longer-term strategic direction for
the company.
Independent boards can also help family-owned businesses
manage one of their biggest challenges: succession. This is
one area many family-owned businesses avoid addressing
since it involves a complicated mix of family and business
concerns. Owners want to do what is best for the business
while also treating all family members fairly and avoiding
family infighting. Family members may have conflicting
expectations about the roles they feel they should play in
the family and the business, which they may perceive as
a right. The presence of a board simplifies the succession
process. When the board is responsible for identifying a
successor, it removes many of the personal issues from
the process; the successor will be selected based on
merit, rather than family position. The owner, meanwhile,
can address family issues without them becoming mixed
with succession.
Types of boards
While in many respects the responsibilities of a board of
advisors and a board of directors are similar, there are
some distinct differences. As its name suggests, a board
of advisors acts as a sounding board for management,
and while it may provide input into a variety of issues, the
CEO may choose to either accept or ignore any of the
board’s suggestions.
Private company governance
structures:
Board of Advisors – Advises the CEO and
management team. Members of the board may
include the owner and members of his/her family,
and/or company employees, and/or people who
are independent of the company. (The ratio of
independent board members to employees to family
members will vary depending on the circumstances
of the company and the owner’s comfort level in
working with independents.) The suggestions and
recommendations of the board are provided as
advice to the owner and management team and are
not binding.
Board of Directors – The role and membership of
a board of directors are similar to that of a board of
advisors, however the decisions of a board of directors
are binding.
Family Council – A family council normally works in
conjunction with the company’s board. The council’s
role is to oversee the family interests in the business.
It also provides a forum where family matters can
be discussed away from non-family members of the
board of advisors or board of directors. Members
of the council are restricted to the owner’s family,
though there may be ex-officio (non-voting) members,
such as legal counsel, to advise on specific issues.
The protocols of a family council are usually set
out in a family charter, which provides a family
vision and mission statement and ground rules for
council meetings.
A board of directors has a fiduciary responsibility to the
company, and is required to consider the greater good
of it and all of its stakeholders—as well as its progress
towards strategic goals. The board, therefore, will
provide oversight of management and will make sure
management is keeping the best interests of the company
in mind. A board of directors’ decisions are usually binding
on the company’s management. (However, since the
board is responsible to the company’s shareholders, the
shareholders—either the sole owner or the group of
owners—have the authority to dismiss the board.)
Private company governance
Role, responsibilities and
structure of the board
Transparency and reporting
As with boards of public companies, the role of a
private company board is one of oversight. Many of the
specific responsibilities of a private company board are
also essentially the same as those of a public company
board, including but not limited to, oversight of strategy,
reviewing the company’s financial performance, ensuring
that risks to the company are identified and mitigated
appropriately, ensuring that a succession plan is in place for
the CEO, etc.
Because their roles and responsibilities are similar, private
company boards should adopt leading practices of public
company boards. However, a private company board will
often need to adapt or scale some of those practices to
suit the company’s specific circumstances; most private
companies, for example, won’t have an internal audit
department so a private company board’s responsibilities
with respect to an internal audit function may differ.
Similarly, since private companies are usually much smaller
than public companies, their boards will also likely have
fewer members and may not need the same number
and diversity of board level committees as a public
company board.
Often, independent board members are asked to provide
their expertise and experience to augment management’s
skills and knowledge in certain areas. (In doing so, they
should act as advisors to management, but should not
manage activities themselves.) Because of their smaller size,
however, the board may not have deep expertise in every
area where it’s needed. A common practice is to invite
outside experts to address the board on matters where the
board members could benefit.
Most private companies don’t have the same requirements
to disclose financial and other company related information
as do public companies. However, transparency is just as
important for private companies. It is particularly important
in the case of family businesses, which should have the
same level of transparency with the family stakeholders as
a public company has with its shareholders. Transparency
can help reduce misconceptions and conflicts among
family members.
Private companies should consider publicly disclosing
information about their activities and governance practices
that provide them with a competitive advantage—for
example, if those activities will lead to better financing
conditions, better arrangements with suppliers, increase in
their customer base, etc. They may also want to disclose
information about their ethical practices and sustainability
activities since these issues are important to private
company stakeholders and the disclosures can help the
company enhance its reputation.
Qualities of board members
Since the owner’s close friends and associates will share
many of the business owner’s viewpoints and experiences,
companies should look outside that circle when recruiting
independent board members. That’s because a key benefit
of having independent board members is their different
and diverse perspectives, as well as their ability to augment
the business owner’s own knowledge and expertise with
their own different backgrounds and experience.
As with all boards, education is important since board
members will need to keep pace with the business’s needs
as it evolves, its industry changes, and new challenges
arise. The board and each of its members should be
evaluated every year to ensure that they continue to meet
expectations, and that their skills keep pace with the
changes and growth of the organization.
“Governance should add value to the organization. Private companies that
view the board as an instrument of accountability, growth, and strategy will
realize that value. The wealth of knowledge and experiences that independent
board members have can enhance the owner’s own skills and capabilities,
and their different perspectives may bring owners a range of new ideas and
Daniel Aguinaga
Partner, Corporate Governance and Sustainability
Deloitte Mexico
approaches to strengthen the company.” – Daniel Aguinaga
Private company governance
An independent board member’s perspective
Marcelo Rivero has
30 years experience
as a CEO of consumer
products companies
in Mexico. He
is currently the
president of Brain Strategic Insight
and a board member of several private
companies, including CISA, ASUFIN,
CTS (Corporate Travel Services), Gayosso,
IC Intracom, CISE, 4e de Mexico, RUA,
Gomasa, Rendilitros, CASA Cravioto,
ALSEA (until April 2015), Asufin y
Colusa, Automotriz Chiapas S.A. de C.V.,
Banware, and others.
Are private companies in Mexico encouraged to
have independent board members?
Mexico has a large number of private companies, and
the government, universities, and other groups are
encouraging them to improve their governance practices
by creating an independent board of directors. That’s a
difficult step for people who have owned and managed
a business very successfully. For many of them, it’s a
gradual process. At first, they may appoint a single
independent board member, and when they become
comfortable with that, they may add more of them.
At some point, however, the independent board
members and the owners will disagree on a strategy
or some other item. That is usually the test of how
committed the owner is to having independent members
of the board.
I’ve worked with several private company boards.
The owners need time to learn how to work with
independent board members, and the independent
board members—especially people serving on a board
for the first time—need time to learn how to work with
the board and with the owners.
What advice would you give to someone who is
asked to serve on a board?
Before agreeing to join a board, it’s important to do
some research about the company, its board (if it
currently has one), and the owner.
You need to learn about the company’s financial
situation, its business situation, and the key issues
the company and the board are focused on. Is this a
company you want to become involved with and do you
have the experience in the areas where it is needed by
the company?
It is also important to understand what kind of board
the company has and what its role is. For example, is the
company establishing a board for the first time, or does it
already have a board with a mature governance process?
If it has a board, what does the company expect from
the board and from the individual board members? Is the
board stable or is there a high turnover rate among its
members? You want to be sure you are joining a board
where your opinion as an independent board member is
seen as having value.
Another important consideration is why the owner
wants to have independent board members and how
well the owner works with them. Does the owner
believe independent board members will help make the
company successful, and is therefore willing to work
with them and the board? Is there an attitude of mutual
respect between the owner and the independent board
members? If the owner wants them on the board for
another reason—perhaps just to gain industry insights or
knowledge—that may indicate the owner isn’t willing to
share key information with the board or accept its advice.
How well understood is the independent board
member’s role on a private company board?
There can be confusion about the role, so it is important
that independent board members establish clear
ground rules. When they first join the board, they need
to clearly communicate to the owner and the other
members of the board that they will provide advice and
guidance, and they will be open and honest in their
recommendations, but that they are also independent,
which means they may not always agree with the owner.
If independent board members don’t make this clear
from the start, or if they try to play a social or collegial
role on the board, the owner won’t consider them as
being independent. That will be a problem when an
independent board member disagrees with the owner.
Owners may accept some disagreements over minor
decisions, but if it is something larger—for example,
a strategic decision—the owner will not accept a
challenge from a board member who isn’t understood to
be independent.
What should independent board members do to build
a good working relationship with the owner?
First, as I just mentioned, they need to set clear ground rules
about their independence. Next, they need to understand
that they are part of a process. They aren’t going to change
everything all at once. Instead, they will need to take things
step-by-step, address some key issues today and then, at
the next meeting, they can focus on moving something
else forward.
Another challenge for private companies is talent and
developing the people the company will need in future. That’s
because many private companies are staffed by the owner’s
family and close friends. While they have existing relationships
with the owners, and may be very good at what they do, they
often don’t have all of the necessary skills. Because of this
close relationship, the owner may not recognize that they lack
expertise in a certain area, so the board can provide oversight
and guide management on addressing talent concerns.
It’s also important that independent board members do not try
to present themselves as experts with the skills and knowledge
to make all of the decisions on a subject. A mistake made by
many new board members—especially people with a lot of
business experience but no previous board experience—is not
limiting themselves to providing oversight and advice to the
owner, but actually attempting to manage the company.
One of the biggest “people” issues for a private
company is succession. How can the board help?
Succession in a privately held organization can be challenging
for both the business owner and the board. For business
owners, succession is extremely personal, and often they don’t
want to address it until it can no longer be ignored. Then, if
they haven’t developed someone in the family with the skills
to continue running the business, the situation is very difficult
to manage.
It takes time for boards and independent board members
and owners to learn how to work together. In my experience,
business owners are willing to consider an independent board
member’s recommendations as long as they are given time
to think about them and the board member respects the
owner’s position, including the fact that, ultimately, he or she
has the final decision. For their part, it takes courage for an
independent board member to challenge a business owner;
they need solid evidence and arguments to support their
position, and they need to be clear that the analysis and advice
they are providing is given in the best interests of the company.
Where can independent board members make their
biggest contribution?
A lot will depend on the position of the company and the
board member’s own knowledge and expertise. In general,
though, many private companies are weak in strategic thinking
and need a strategic process. Many business owners make
decisions based on what worked well in the past; they’re not
used to looking at things in a different way or following a
strategic planning process to identify the best future direction
for the company. This is where independent board members
can play an important role.
Because succession is such a difficult process for many owners
and their families to discuss, independent board members
should create a communication system outside of the board
itself. Perhaps, they will begin working with just one or two
members of the family before taking the issue to the full board.
That way, important but difficult issues, like succession, don’t
need to be discussed in front of everyone, but instead can
first be presented and discussed in a smaller group. Creating
the right communication system with smaller meetings where
the director can gain the confidence of the owner and the
family is important when matters need to be addressed.
Contacts
Dan Konigsburg
Managing Director
Global Center for Corporate Governance
Deloitte Touche Tohmatsu Limited
[email protected]
To read our previous On the board’s agenda issue focused on Base Erosion
and Profit Sharing, and to receive upcoming issues, please contact us at
[email protected]
Michael Rossen
Director
Global Center for Corporate Governance
Deloitte Touche Tohmatsu Limited
[email protected]
www.global.corpgov.deloitte.com
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support your board’s needs.
Acknowledgements
The Deloitte Global Center for Corporate Governance would like to thank all of its professionals who assisted with drafting, editing, and reviewing
this alert, including those listed below:
Co-authors: Chantal Rassart (Deloitte LLP) and Hugh Miller (Hugh Miller Communications).
Technical Reviewers: Lorrie King, Harley Mintz, Robert Rosone, Michael Rossen, Kevin Tracey, and Mark Whitmore.
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